Financial Post, Weekly edition, Sat 30 Dec 95, page 36

CANADA TO LEAD G7 IN ECONOMIC GROWTH:

Bud Jorgensen Economics Reporter

Notoriously optimistic analysts at the Organization for Economic Co-operation and Development predict Canada will have the fastest-growing economy in the G7 over the next two years.

They made the same prediction a year ago and were wrong about 1995.

But the odds are much better that they have it right this time.

While there is a difference of opinion over whether the economy can avoid a recession in 1996, there is less dispute over the thought that Canada is poised to beat the competition.

Even if there are recessions in G7 countries in 1996, the fundamentals in Canada should position the economy here to better withstand a global slump.

The consensus is that economies now are going through a slowdown but there will be a rebound in 1996.

The OECD sees 3% real growth for Canada next year and 4% in 1997.

``This growth profile reflects a renewed stimulus from demand in the United States and an increasingly positive impact of recent expected monetary easing on economic activity,'' says a just-issued OECD report on Canada.

``Export growth should be bolstered by the substantial improvement in Canada's competitive position over the past few years, which has been reversed only to a small extent by the recent strengthening of the Canadian dollar.''

From a vantage point in the present, it's hard to imagine that the Canadian economy could outperform the U.S. economy. Consumers have left retailers with the worst Christmas sales season since the last recession. While all the numbers are not in yet, there is a real possibility that gross domestic product declined during the fourth quarter.

The one solid area of strength in the second half of 1995 was the export market. However, roughly 80% of Canada's exports now go to the U.S., a case of too many eggs in one basket.

But other economic signs are more favorable:

- For almost five years, the inflation rate in Canada has been lower than the U.S. rate.

- The Canadian corporate sector has gone through a fundamental restructuring.

- A capital spending boom that has lasted almost three years has positioned corporate Canada to make steady gains in productivity.

- Exporters are making progress in diversifying into non-U.S. markets.

- Trade with other countries has produced record supluses in recent months.

- Governments in Canada have made solid progress toward controlling deficits.

Economists look at these trends and can see a day in the not-too-distant future when Canadian interest rates will be lower than U.S. rates.

There is a deficit now for the national capital account because the trade surpluses are swamped by interest flows to foreign investors who hold Canadian debt.

``With sharply reduced fiscal deficits and sluggish economic growth, the current account will swing from deficit to surplus,'' says Carl Weinberg, chief economist at High Frequency Economics in New York.

``At that time -- with no need to borrow from foreigners -- interest rates will be able to drop to levels lower than U.S. rates for the first time in this half-century.''

Business economists, collectively, are not so bullish about Canada's prospects as the OECD and the consensus forecast is for real growth of about 2.3% in 1996, roughly equal to what is expected from 1995.

Weinberg's reference to sluggish growth is seen by many as a good sign because slow but steady expansion avoids a risk of inflation, particularly from wages and salaries.

As consumers, Canadians see this issue from the big end of the telescope. Real incomes have fallen steadily since the 1991-92 recession and household disposable income is down almost 9% in that period.

The flip side is that Canada is rapidly becoming one of the most wage-competitive countries in the industrial world.

Unit labor costs in manufacturing are down by almost 25% since 1991.

Of 24 economies tracked by the OECD, only three others have a better record: Italy, Sweden and Finland.

Unit labor costs also are declining in the U.S. but at less than half the pace of decline in Canada, according to an OECD ranking.

A trend to watch in 1996 is the unemployment rate.

Unemployment has been rising since the end of the Second World War. The baby boom provides part of the answer -- the economy did not grow fast enough to accommodate the bulge in prime working years -- and unemployment should fall as boomers retire

Technological change is another factor, and some workers are being squeezed out as the economy is restructured.

The consensus forecast is that unemployment probably has peaked at current levels of about 9.5% and should decline slowly if Canada's economy outperforms other industrial economies.

Stronger growth may bring the threat of a resurgence in inflation, but no one sees a serious problem in the near term.

The consensus outlook for 1996 is that the consumer price index will rise at about the same pace set in 1995, which was about 2.4%.

In summarizing the outlook for 1996 and beyond, the Canadian Manufacturers' Association calls it ``a tale of two economies.''

The engine is an ``export-oriented economy that has accounted for most of the growth in output, employment and investment over the past four years -- an economy that is basically riding an American business cycle.''

The caboose is ``a domestic economy dependent on consumer and government spending -- an economy that has not yet recovered from the recession of the early 1990s, that is barely growing at present, and which is likely to remain weak throughout the remainder of this decade.''

The OECD, which looks at Canada's improved productivity and corporate profitability, sees a quicker turnaround in pent-up domestic demand.

	This information is provided by the Financial Post.
	Please send comments to: g8@utoronto.ca Revised: May 10, 1996

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